Cryptocurrency as Payment for Legal Services – A South African Perspective
Recent reports on the regulation of cryptocurrencies in South Africa, expected to take effect by the end of 2022, suggests a shift in payment preferences for financial products and services looming around the corner.
We currently have over 10 000 cryptocurrencies available, that is a staggering 4 000 more than reported in July 2021. The demand for crypto payment solutions and more crypto-friendly practices, especially amongst the younger and pro-crypto generation, whose unwavering support for the currency will change the way we perceive and receive client payments, is growing by the day.
Now might be an opportune time to get more informed on how cryptocurrencies work and how the South African authorities view it.
Legislatively, the term ‘crypto asset’ replaced cryptocurrencies,’ to better describe the various forms they can take. See below examples of its different uses:
- Payment Instruments
- Investment Schemes
- Means of raising capital
The use of crypto assets as a payment instrument is not a legal tender in South Africa, then how can crypto assets be legal?
In their press releases on crypto assets, the Intergovernmental Fintech Working Group (IFWG) answers the following questions:
- Are crypto assets money?
In South Africa, the term “money” refers to banknotes and coins issued by the South African Reserve Bank, which makes crypto assets non-monetary
- Are crypto assets e-money?
Again, the answer is ‘No.’ E-money may only be issued by a registered South African Bank in terms of the National Payment Systems Act 78 of 1998.
- If crypto assets are not money, can it replace actual money as a means of payment for goods and services?
The answer here is ‘Yes.’ Whilst not money, there is nothing that expressly prohibits parties agreeing to accept payment in crypto assets at their own discretion.
By entering into an agreement, both parties accept the risk that this transaction will be no recourse for losses suffered if anything goes wrong. The use of crypto assets in settlement for products and services is a barter transaction and the crypto asset a type of barter instrument; and the price determined in terms of the ‘willing-buyer-willing-seller’ principle.
In her book “How to Accept Bitcoin at Your Law Firm”, Teresa Match identifies three critical steps to help maintain due diligence when choosing to accept crypto assets as ‘payment’ for legal services, which will ensure that the risk to both parties is mitigated.
- Notify your client that you will be converting the crypto asset into currency
Crypto assets are very volatile, and prices can fluctuate wildly at short notice. It is therefore important to let your client know that you will be converting these assets into Rand on receipt and not holding it as a crypto asset.
This will reduce the risk that comes with varied fluctuations between receipt and conversions, it also manages the client’s expectations when it comes to billing management.
- Value the crypto asset at market rates
It is important to identify a Crypto Asset Exchange to value these assets. The exchange will need to be licenced to operate in South Africa. Majority of these exchanges will also assist with the various disclaimers and submissions required when converting crypto assets into money. You must however ensure that you deal with a South African registered entity to further mitigate risk.
- Convert the crypto asset and credit the client’s account
As soon as you have received the crypto assets from your client, convert them immediately and issue a credit note against your client’s trust account for settlement against fees.
Risk is vastly increased, when your client trusts and requests that you hold their bitcoin for a purpose other than the payment of services, as you might potentially be assisting your client in money laundering activities; and therefore, holding onto bitcoin assets should be avoided at all costs.
Tax Legislation Treatment
Gains and losses made from crypto assets are taxable as part of the taxpayer’s taxable income.
SARS considers crypto assets to be of an intangible nature. When valued, it can determine the amount received or accrued within the definition of ‘gross income.’
In an article released in April 2018, SARS determined that gains and losses from crypto assets could be categorised with reference to three scenarios, which was set out as follows:
- Crypto assets can be acquired through a process called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved by solving complex computer algorithms.
- Investors can exchange local currency for a crypto asset (or vice versa) by using crypto asset exchanges, which are essentially markets for crypto assets, or through private transactions.
- Goods or services can be exchanged for crypto assets. This transaction is regarded as a barter transaction. Therefore, the normal barter transaction rules apply.”
The onus is on the taxpayer to declare their gains and losses on their income tax returns. Normal interest and penalties will apply if there is a failure to do so.
Whether the acceptance of crypto assets for legal services will ever see the day of light, is questionable. Whilst there is nothing specific preventing this, the risks associated with crypto assets are likely to remain a deterrent.
However, the latest data from the IMF’s Chain Analysis Unit identified South Africa, Tanzania, Kenya, Ghana, and Nigeria amongst the counties that have rapidly adopted crypto assets.
We recently had the opportunity to speak to Taiwo Lawal, an Associate from Acelera Law, a Nigerian legal firm focused on providing specialised legal services for start-ups; and she has taken the following stance on crypto assets being exchange for the delivery of legal services:
“Players in the crypto system are ready to pay with crypto, but legal service providers; at least in Nigeria, appears not be ready yet. It depends on the type of crypto you accept. USDT is particularly stable. It has been growing overtime. Taking other cryptos that are not stable coins may not be the way to go, and one might end up taking a gamble with the firm’s money.”
Regarding firms accepting crypto assets, she commented the following:
“Because there are multiple ways lawyers can maximise payments in crypto, a lawyer or law firm may receive payment in a diverse number of coins, but it is advisable to convert it almost immediately or sell it off and obtain the value of the coin, especially if the coin is volatile. Making sure one understands the blockchain space is as important as receiving any form of payments in crypto. It is the first step.”
Only time will tell if there is greater chance for crypto transactions to take place in these countries.